Aug 10, 2007

Nervous brokers at the New York Stock Exchange on Thursday; photo courtesy of AP/Richard Drew

Wall Street plunged even further this morning after the opening bell as fearful investors worried about tight credit conditions began a massive selloff. The Dow has fallen over one percent in the fist half-hour, despite an announcement by the Federal Reserve that it would do all it could to "facilitate the orderly functioning of financial markets."

Over the past two days the Fed has added $43 billion in temporary funds to the nation's banking system through the purchase of mortgage-backed securities in an attempt to meet demand for cash as a result of the rout in bonds backed by home loans to subprime borrowers.

Global markets shared Wall Street jitters, as overnight Japan's Nikkei 225 index dropped 406.51 points, or 2.37 percent, while the Korea Composite Stock Price Index fell 80.19 points, or 4.2 percent. The European Central Bank loaned more than $130 billion in overnight funds to banks at the low rate of 4 percent in attempt to reassure investors. Some analysts view the move by the ECB - which has pumped over $212 billion into the markets over the past two days - as merely confirmation of a global credit crunch.

I have long feared the overreliance of the U.S. economy on the housing market for the past decade, and have speculated that we are about to see a significant burst of the housing bubble. Still, the ferocity of the two-day selloff has been unsettling even to this relatively detached observer.

Going into August our 401-K returns had been spectacular, and we were up over 20 percent in the first eight months of the year. While I am not ready to dump the portfolio and invest in the three G's - gold, guns, and green beans - I watch with more than a bit of unrest what appears to be the beginning of full-blown bear market.

I'm just glad I have low consumer debt, fairly high home equity, and some liquidity in my investments, as we might be hitting one of those proverbial periods of fecal matter running into air movement devices.

Addendum, 11:28 AM: The Fed just announced that it will provide "reserves as necessary" to calm the markets in the wake of the fallout from the escalating credit crisis. At the moment the Fed has decided against cutting the federal funds rate to reduce fears of shrinking credit.

Agreed about the increasing irrelevance of traditional economics. This derivative-based mania of the last 20 years is downright scary, as we increasingly are putting our money in investments that bear little relation to actual products and services.